Slight sentiment fall suggests consumers still concerned about living costs

Posted on: 29 Aug 2024

• Small slippage suggests continuing caution rather than growing gloom
• Concerns about outlook for household finances may reflect back-to-school costs and looming seasonal increase in spending pressures
• Global economy and Tech wobbles also weigh on mood of Irish consumers
• Domestic factors drive contrasting moves in confidence measures elsewhere

• One in five consumers say their household finances are better than they expected at the start of the year, while one in three consumers say they are worse than expected
• Those aged 45-64, those on lower incomes and female respondents more likely to be disappointed
• 10% of consumers say their household incomes rose more than expected while 17% say it has risen less than expected and 42% say their household income hasn’t risen in 2024
• 22% of consumers say their household living costs have risen less than expected or not all in 2024 while 44% say their living costs have risen more than expected   

Summary

Irish consumer sentiment weakened slightly in August as concerns about pressure on household living costs in the months ahead and renewed nervousness about the economy weighed on consumer thinking.

The softening in sentiment in August was relatively modest and likely owes something to worries about higher energy bills in coming months as well as back-to-school costs followed by Christmas spending pressures.

Turmoil in global financial markets amid fears of recession in the US coupled with high profile tech sector job layoffs may also have played a part in the weaker Irish consumer confidence reading.

It should be noted that the slippage in sentiment in August was limited and does not suggest a major change in Irish consumer thinking. After two forward steps in the June and July figures, it is not entirely surprising to see a backward step in sentiment in August as Irish consumers continue to face elevated living costs and ongoing economic shocks. 

 

Section I; August sentiment survey suggests Irish consumers still under pressure and see continuing economic risks

The Credit Union Consumer Sentiment Survey (in partnership with Core Research) shows an index reading of 72.0 for August, down modestly from the July figure of 74.9. The August reading marks the first monthly decline since May and follows significant improvements in both June and July.

Importantly, the 2.9-point drop in the sentiment index in August is less than a third of the cumulative gain seen in the previous two months. As such, it doesn’t suggest a major setback in consumer sentiment.

Instead, it emphasises that many Irish consumers continue to be under significant financial pressure and risks to the economic outlook remain substantial. Neither the trend in household finances nor economic news-flow is sufficiently positive at present to ensure that consumer sentiment continues to post consistent month-on-month gains.

The softer August reading of the Credit Union Consumer Sentiment Survey (in partnership with Core Research) also emphasises the focus of the survey on economic and financial concerns. While disappointing weather through much of the survey period might be expected to weigh on the mood of Irish consumers, it appears a very successful Olympic games for Ireland did not produce a pronounced ‘feel-good factor’ to distract consumers from their economic and financial concerns. In the context of the old Roman adage, it seems that Irish consumers are much more concerned with Bread than with Circuses.

Contrasting domestic developments drive varying sentiment readings globally in August

As the diagram below illustrates, the slightly lower Irish consumer sentiment reading for August contrasts with a marginal increase in the preliminary number for the comparable US sentiment measure.

The authors of the US report suggest that marginal gain stems from a slightly larger improvement in sentiment among Democrat voters than the decline reported by Republican voters. Interestingly, Democratic candidate Kamala Harris is seen as slightly better for the US economy than Republican candidate Trump overall whereas, a couple of months ago, the same survey showed consumers felt Trump was better for the economy than the then Democratic candidate, Joe Biden.

The weaker Irish sentiment reading for August is consistent with a small drop in the preliminary consumer confidence reading for the Euro area. We might speculate that high holiday costs and stubbornly high living costs, more broadly, weighed on European consumer thinking. 

In the UK, consumer confidence held broadly steady in August, with a weak economic outlook offset by improved expectations for household finances. The announcement of a rate cut by the Bank of England on August 1^st is likely to have improved thinking on household finances, both directly by easing mortgage burdens and indirectly by signalling confidence in a sustained easing in inflation.     

 

Slippage in Irish consumer sentiment in August was broadly based

All five elements of the Credit Union Consumer Sentiment Survey (in partnership with Core Research) weakened month-on-month in August, suggesting a generalised shift in thinking rather than one driven by a specific development during the survey period.

In turn, this slippage might be seen as consistent with a correction-rather than a clear change in direction-after two very strong monthly increases in June and July that reflects the fact that household finances are not seeing a dramatic improvement and economic risks remain prominent.

It is notable that Irish consumer thinking on the general economic outlook weakened a good deal more than their views on job prospects. The survey period saw significant turmoil in financial markets on concerns about a recession in the US and ongoing nervousness about possible overvaluation of Tech stocks.

Not surprisingly, these developments weighed on consumers’ views on Irish economic prospects, notwithstanding continuing strength in the domestic economy as illustrated in buoyant monthly tax returns.

Perhaps surprisingly, thinking on the outlook for the jobs market weakened only marginally during a survey period which saw Intel announce an intention to cut 15% of its workforce, indications of further job cuts at TikTok and Ireland’s unemployment rate climb for a fifth successive month to 4.7%, the highest level in more than two years.

The relatively restrained consumer response to these developments likely reflects both the fact that job losses in the Tech sector have been a concern for some considerable time as well as the broader health of the jobs market in Ireland at present.

In that respect, the picture painted by the consumer sentiment survey seems to be one of a jobs market that may be cooling somewhat but is not seen at any risk of collapsing.  

While there was a fractional softening in consumer thinking in relation to how their household finances had developed in the past year, the small size of the decline is best thought of as signalling no change in consumer thinking in this area. As mentioned previously, while Irish inflation has eased markedly, living costs have not fallen back and continue to rise albeit modestly of late from already elevated levels.   

In marked contrast to their thinking on how their household finances had developed over the past twelve months, the August survey saw a significant downgrade in Irish consumer thinking on the outlook for household finances in the next twelve months.

The reasons behind this deterioration are not immediately obvious but a number of factors can be suggested. First of all, the trend in consumer prices in recent months is still upwards. The annualised increase in Irish consumer prices over the three months to July was 4.5%, significantly reflecting large (and partly seasonal) increases in holiday and housing costs. Of late, there are also some signs of upward drift in grocery price inflation according to Kantar figures and increases in fuel prices.

With higher carbon taxes to come and seasonal spending on fuel and light set to increase materially, many consumers may be beginning to contemplate a challenging winter ahead. More immediately, back-to-school costs loom large while the increasingly long build-up to Christmas spending demands is not far away.

Add to this some hawkish voices at the ECB suggesting declines in borrowing costs may be slower and smaller than previously thought and the general mood music is one of continuing stains on family finances for many Irish consumers.

Again, we would caution that the August assessment of the outlook for household finances likely represents a correction rather a complete change in thinking but it also signals that Irish consumers believe pressure on household finances will be longer and stronger than they previously thought.      

Understandably, Irish consumers also downgraded their spending plans in August. However, it could be argued that the most notable aspect of this area of the survey was that the pull-back in spending plans was relatively modest.

Again, this hints that the slide in sentiment is an adjustment after a couple of months of significant improvement rather than a turnaround in consumer thinking on their economic and financial prospects.

Section II; Do consumers think 2024 has been better or worse than they expected so far?

As is usual, the August reading of the Credit Union Consumer Sentiment Survey (in partnership with Core Research) contained several special questions intended to shed light on current consumer thinking on particular topics.

In August, the special questions focussed on consumer perceptions as to whether 2024 so far has been better or worse than they expected at the start of the year.

On most ‘macro’ metrics, developments in the Irish economy over the first eight months of 2024 have been notably better than might have been feared and somewhat better than was generally predicted.

Economic activity has been reasonably resilient although there have been wide variations across sectors and, accordingly, across communities. Inflation has eased and various reports hint at a clear if uneven pick-up in earnings.

However, living costs remain elevated and have continued to increase while high-profile redundancies continue and the economic outlook remains uncertain. Moreover, population data suggest some element of higher activity could be mechanically attributed to larger numbers living and working here. From the perspective of the individual consumer, the overall size of the economic ‘cake’ may matter less than the slice they receive.

As the diagram below indicates, while roughly one in five consumers (21%) say their financial circumstances have been better than they had expected, a clearly larger one in three consumers (32%) say 2024 had proven tougher than they thought it would be.

 

Looking at the demographic breakdown of these responses, males were notably more likely than females to say their financial circumstances were now better than they expected at the start of the year.

Younger consumers were also more likely to say their financial circumstances were better than they had anticipated, perhaps reflecting entry into the jobs market and early advances in their careers as well as fixed living costs or parentally subsidised costs for those living at home.

In contrast, those aged 45 to 64 were more likely to say their financial circumstances were poorer than they expected and less likely to say they had improved. This could be the result of reduced scope for increased earnings as well as increasing family spend on a range of areas such as children’s education and activities as well as pension provision.  

While those aged over 65 were less likely than average to say their financial circumstances had improved more than they envisaged this year, they were also less likely to say they had worsened. This likely reflects a significant degree of fixed-income budgeting among this demographic.

To look in more detail at the reasons why consumers felt their financial circumstances in 2024 had been either better or worse than they had expected, the August reading of the Credit Union Consumer Sentiment Survey (in partnership with Core Research) also contained questions separating the impact of developments in household incomes and household living costs.

Responses to this question, shown in the diagram below, suggest that shortfalls in income and higher than expected living costs have both been important features of Irish consumers experience of their household financial circumstances in 2024.

The responses shown in the diagram above suggest that the share of consumers reporting ‘negative surprises’ in the form of lower than envisaged increases or no increase in incomes or higher than expected increases in living costs substantially exceeds the number reporting ‘positive surprises’ in the shape of higher-than-expected increases in household incomes or lower than expected or no increases in costs.  

Just one in ten consumers (10%) say their household incomes have risen more than expected this year. This result may be coloured by consumer expectations that pay increases would offset recent increases in the cost-of-living not being borne out.

With many pay deals offering only a partial offset to inflation, and State welfare and pension payments reflecting the October 2024 Budget announcements and delivering significant additional amounts in late 2023, it is not entirely surprising that a relatively small number of consumers say their incomes have increased more than they expected at the start of the year.   

At first glance, it may seem surprising that as many as two in five Irish consumers (42%) say their household income hasn’t risen in 2024. However, the timing of individual pay deals may mean that for some consumers, no increase has emerged thus far in 2024.

More significantly, not all companies are likely to increase pay in 2024. One report from March this year (CIPD-IRN Private sector pay and employment report 2024) noted that only 52% of companies surveyed were planning an increase in pay in 2024. A more recent report (KPMG Enterprise Barometer 2024) suggested that 71% of indigenous firms were planning to increase pay in 2024.

These reports and timing issues suggest that significant numbers of employees (likely ranging from those working in sectors as diverse as Tech and hospitality) have not seen their incomes increase so far this year.

When account is taken of those living on fixed incomes and those whose earnings may be weaker because they come from businesses trading in difficult conditions as well as the payment in 2023 of a range of once-off cost-of-living support measures, the sense that significant numbers of Irish consumers may not have seen their income increase thus far in 2024 may not seem entirely fanciful.

In this respect, this finding also highlights the risks in looking at only top-down macro data to assess the financial health or otherwise of all consumers.

With inflation easing materially in 2024, it may also seem surprising that some 44% of consumers say that their living costs have increased more than they expected this year. In part, this highlights the critically important distinction, particularly at a time of strained household finances, between the speed of increase in living costs, as measured by the inflation rate, which is falling, and the level of living costs which remains elevated and is continuing to increase.

In addition, as an the official inflation rate is a measure of the average increase in prices, it is to be expected that many households would experience a faster rate of increase in prices than official data would suggest. It is also the case that many households, because of changes in family size or family circumstances, would experience additional increases in living costs.  

Overall, the responses to the special questions in the August reading of the Credit Union Consumer Sentiment Survey (in partnership with Core Research) suggest that many Irish consumers have found 2024 to be more difficult than the main Macro metrics might suggest. It might also be suggested that these results would provide some economic rationale for a cost-of-living package in the upcoming Budget.

Another important result is the finding that those on higher incomes are more likely to say their income has risen more than they expected (although there isn’t the same clear correlation between those on higher incomes and those who say that their their living costs have risen more or less than expected). Hence, the survey also emphasises the importance of focussing cost-of-living measures on those most in need.       

ENDS

 August 2024.^th and 13^stThe Credit Union Irish Consumer Sentiment Survey is a monthly survey of a nationally representative sample of 1,000 adults. Since May 2019, Core Research have undertaken the survey administration and data collection for the Survey. This tranche of the survey was live between the 1